Foreign aviation coming together what it gets for INDIAN aviation

-Prof. Jyotinder Chaddha

Road Map for the next 5-10 years

An established vision and accompanying road map for the next 5-10 years; Time Money

• 1. The Vision• - Working with industry, establishing a way forward will be a major aid in

developing what is otherwise in danger of becoming a gridlock system. The industry is so complex and multi-faceted that it requires a long lead time for each of the parts to coincide. - Having a clear and transparent programme to move forward is essential to removing roadblocks;

2. Time• -The development of aviation in India is being seriously constrained by drastically

inadequate infrastructure – airport, road access and airways systems.-Solving this issue is important in time, because every day that is lost in developing new infrastructure is worth millions of dollars to India’s bottom line;-The fundamental issue is that the system was allowed to stagnate for decades, so that when the recent growth surge occurred, there were neither hardware nor plans in place;-The government has done wonders in the past two years – moving to privatisation of airports, merger and restructuring of the once proud national airlines.

3. Money• For foreign investors, two main problems exist: the restrictive regulations on

investment in the aviation sector and the need for certainty of process and policy in airport privatisation.

a) The traditional reluctance to admit foreign funds to local entities has had clear outcomes: -under-investment in Indian companies;-dominance by foreign companies in international markets;-shortage of consumer options; and-loss of economic opportunities;b) In a sector where government cannot deliver the large levels of funding required – and where that shortfall prevents all the flow-on financial opportunities for tourism and other industries – there is a strong message:-admit foreign investors;-permit higher levels of foreign investment in aviation enterprises.

Current Scenario of Indian Aviation Industry

India completed 100 years in aviation sector on 18 February, 2011 The Indian Aviation Industry is one of the fastest growing aviation

industries in the world 454 airports and airstrips; 16 designated international airports With the liberalization of the Indian aviation sector aviation industry has

undergone rapid transformation Being primarily a government-owned industry, Indian aviation now

dominated by privately owned full-service airlines and low cost carriers Private airlines account for around 75% share of domestic airline aviation

market Airline business growing at 27% per annum: Ministry of Civil Aviation

Market Size India is currently the

ninth largest aviation market in the world

India's domestic air traffic grew at a rate, which is the second highest after Brazil according to global figures for June 2011, compiled by IATA

Domestic traffic growth 25-30% annually and international traffic 15% in 2010 :CAPA

Air Traffic The country's domestic traffic grew by 14 per Strong domestic passenger growth rate of 22.3 per cent in

July 2011 Passenger traffic has grown at 18 per cent year on year (y-

o-y) basis and the year 2010 closed at 90 million passengers both domestic and international

In July 2011, airlines in India handled 5 million domestic passengers, according to data released by the Directorate General Civil Aviation (DGCA) on 12 September 2011, marking the 11th consecutive month of double-digit growth

Aviation Trends• Over the past 10 years, the Indian aviation has moved from a closed,

poorly managed and over-regulated industry to a more open, liberalised, and investor friendly sector. Liberalization of the sector and entry of low cost carriers have been the main drivers for the growth. The sector has also witnessed growth in terms of increased airport infrastructure and increased numbers of operating airlines.

• Earlier all airports were in AAI control• However, over last five years, airport infrastructure has attracted private

investment • The Government has increased the FDI limit to 100% in Greenfield airports

and airlines. Larger private sector role in airport infrastructure and management has led the Government to introduce an Airport Economic Regulatory Authority Bill to regulate private airport and airline operators market.

• The number of airlines including low cost carriers has increased. This led to subsequent increase in competition and fare reduction which further fuelled the air traffic growth.

• The sector has witnessed accelerated fleet acquisition activities and present fleet size of all domestic airlines has exceeded 300 aircrafts. However, present downturn may slowdown fleet expansion plans

• Higher fuel costs, structure of high taxes and higher user charges are leading to huge margin pressures on airlines, initiating a trend of consolidation through mergers and acquisitions of airlines.

• Demand for backup and supporting industries like Maintenance Repair and Overhaul, aviation hubs, aviation manpower etc has increased due to the growth in the aviation sector.

• Over the eleventh five year plan period, Rs. 40,880 crores of investment is envisaged in airport infrastructure. Modernization of metro airports comprise 40% of eleventh plan investment where as 35 non metro airports across the India will be upgraded at an investment of Rs 6,149 crores. This forms 15% of non metros investment. However 30% of eleventh plan’s investment is envisaged in development of several Greenfield airports across the India. Approximately 75% private sector investment is envisaged in this period indicating larger role for the private sector.

Entries in the Aviation Industry• Singapore Airlines Ltd., one of the leading global airline brands, has announced its entry

into India in a joint venture with the Tata Group, the third foreign airline to do so after Abu Dhabi’s Etihad Airways and Malaysia’s AirAsia Bhd.

• The airlines are taking advantage of a historic decision by the Indian government in September last year that allowed overseas airlines to invest up to 49% in local carriers Previously, foreign investors, but not airlines, had been allowed to hold up to a 49% stake in India’s airlines.

• Under the agreement it signed with Tata Group holding company Tata Sons Ltd., Singapore Airlines will hold a 49% stake, while Tata will have a 51% in the yet-to-be-named, full service airline in India.

• With this deal, Tata will be doubling its bet on the Indian aviation sector. Earlier this year, the company signed an agreement to start a budget airline in partnership with AirAsia and the closely held Indian company, Telestra Tradeplace Pvt. Ltd. The deal is pending approvals.

• Etihad was the first to enter the Indian aviation sector with a deal to buy a 24% stake in Jet Airways, India’s second-largest domestic and international carrier. That deal is expected to close in the next couple of weeks.

Despite this interest, the Indian aviation sector is still a troubled one.

• Indian carriers lost about $1.6 billion in the financial year ended March 31–with most of this accounted for by Air India and Kingfisher –as a result of increased expenses and declining passenger traffic, according to a report by the Capa Centre for Aviation in Sydney.

• Any new entrant has to to be prepared for several years of losses and a tough domestic market that is dominated by low cost carriers that hold 65% of the market, Capa said in a separate note on the Tata-Singapore Airlines deal.

• That said, India now has only two full-service domestic airlines–national carrier Air India and Jet Airways–and without the legacy issues faced by those two, “Tata and Singapore Airlines may be in a position to establish a more competitive, hybrid business model, offering a high quality product with a lower cost base than incumbent full service carriers,” Capa said.

• The greatest potential may be in international routes as international traffic in and out of India, unlike domestic traffic, has grown every year in the past decade, including during the economic slowdown. However, since Indian regulation requires a new airline to operate in the domestic sector for five years before it can fly international routes, this opportunity is still some way off.

• The more immediate question is how will Tata manage its two competing agreements? While one is for a new budget carrier and the other is for a new full-service airline, the two will still largely be playing in the same sandbox, at least until Indian authorities relax their five-year rule on international flights (and there’s no clarity on when that might happen).

• Until then, there might be a lesson in management on how Tata dances with two, competing partners.

•Case Studies

• Etihad deal good for Jet, but not for Indian aviation: experts• Jet Airways' decision to sell a minority stake to Etihad Airways for Rs.2,060 crore may not bode well for the

Indian aviation sector, especially national carrier Air India, experts say.• India's first major aviation investment by a foreign airline after the government eased ownership rules in

September comes close on the heels of Jet seeking a three-fold expansion of air service capacity between India and Abu Dhabi.

• The deal will direct traffic away from major aviation hubs in India, such as Delhi and Mumbai, to Abu Dhabi, where Etihad Airways is based, the experts add.

• Jitendra Bhargava, former executive director at Air India, told NDTV, "The deal would have been fully, unconditionally welcomed had it taken place three months ago. The very fact it is taking place in the wake of Jet's request to the government that the seats on the India-Abu Dhabi sector be increased from 13,000 seats to 53,000 seats makes it look like that the valuation has been triggered by such a development."

• Jet is reportedly planning to connect to 23 Indian cities with Abu Dhabi in the long and medium term, requiring over 41,000 seats per week by 2016.

• Under the current bilateral agreement with Abu Dhabi, Indian carriers are jointly allowed to operate 13,300 seats each week on that route, with 2 per cent operational flexibility on this capacity.

• Sources told NDTV late on Tuesday that India and Abu Dhabi had agreed to expand their bilateral capacity to over 53,000 seats per week.

• On why the deal is not a good development for the Indian aviation sector, especially national carrier Air India, Mr Bhargava said the Indian government's aviation policy is contradictory.

• "On the one side you are infusing funds into Air India to keep it afloat and on the other side you are facilitating the taking away of passengers. The deal cannot be described as being in the interest of the Indian aviation industry," he added.

• Air India runs up a staggering operational deficit of Rs. 14 crore every day, according to the Dholakia committee set up to recommend measures to bring back the ailing airline to profitability.

• Kanu Gohain, former director general of civil aviation, told NDTV: "One can read between the lines and say that this deal will certainly funnel out Indian traffic into Abu Dhabi from where Etihad will mount its flights to Europe and the US at the cost of other Indian carriers, particularly Air India."

• "No doubt there will be some benefits to passengers, and from the connectivity point of view, but one should understand that if we allow too many concessions and liberty, then after Dubai, Abu Dhabi will become the second hub of connectivity to the Western hemisphere," Mr Gohain added.

• Indian carriers, battling stiff competition and high operating costs, have also sought massive expansion in their weekly schedules, with IndiGo demanding over 5,000 more flights, SpiceJet 5,936 more and Air India 2,400 additional services, official sources said.

• "It will not end with (the) Abu Dhabi bilaterals. We know Emirates and Qatar Airways are in the queue. There will be no No. 2 left on the India-Abu Dhabi sector," Mr Bhargava said.

• "We may say that this will benefit the passengers... You will lose for all times to come the opportunity to develop a hub in Delhi, Mumbai or Kolkata, he added. Why is it that Indian aviation still does not have a national aviation policy?"

Tata-SIA• Game Changer• Six decades• Investment of $100 million• Expected • Birth of civil aviation in India in 1932 • Foiled • Whether the timing for entering the aviation sector is opportune.• Huge debts and mounting losses, not because all of them are inefficient or

the industry is vulnerable to economic ups and downs but because the Indian market is price-sensitive. An increase in fares instantly impacts growth

• The domestic market is divided

• As the new entity will have deeper pockets than the promoters of existing airlines• By full-service and low-cost airlines the industry will feel the impact • Well-deliberated policy there would have been rules laying down the number of

airlines that the country could effectively have; and the number of aircraft or seats that can be gainfully operated for domestic operations. In the absence of a transparent mechanism, the government is taking decisions on a case-by-case basis which hasn't helped the industry so far

• The other question that begs an answer is whether it is desirable for the Tatas to be stakeholders in two airlines, ostensibly serving different segments of air passengers. Will there be a conflict of interest with both Air Asia India and the new airline operating on the same routes? In the pre-merger era, Indian Airlines always objected to Air India's domestic operations; and Air India did the same with regard to Indian Airlines' international flights on the grounds that it was hurting its commercial interests by charging lower fares.

Air Asia – Tata Sons• AirAsia to tie up with Tata Sons for new airline in India • India's aviation sector has been going through turbulent times because of high operating costs

and fierce competition. Domestic passenger traffic fell six per cent in the first nine months of 2012 because of a steep rise in fares, Jet Airways, India's second biggest airline group by market share, said in an analysts' call.

• However, the budget carrier has a big advantage over the others: its cost per passenger kilometre excluding fuel is the lowest in the world at just $2.

• SpiceJet is close with $2.2. Experts say IndiGo, Jet Airways, SpiceJet, Air India and Go Air are likely to come under pressure and drop fares further once the proposed carrier picks up momentum.

• "India, with its low flyerbase, regulatory challenges and high cost structure, cannot afford more than four strong national airlines."

• AirAsia had been waiting in the wings ever since India opened the airlines sector to investment by foreign carriers about six months ago.

• But when Fernandes announced the decision to join hands with the Tatas, many in the industry were surprised.

• The Tata's pioneered civil aviation in India when they set up Tata Airlines in 1932, but the government took over the airline in 1953 and rebranded it Air India.

The group made some attempts at re-entering the market over the years, but its plans failed to take off. Now, it is back in the airline business under the Tata group

JP Morgan analyst Corrine Png says in a note that tying up with the Tatas/Telestra could facilitate access to route rights, accelerate regulatory approvals and provide a better understanding of the Indian market. She adds domestic airlines will be hit by AirAsia, which plans to operate out of Chennai.

"We think this is negative for the Indian carriers, especially SpiceJet given its major presence in Chennai and Tier II/III cities exposure.

" Some industry experts say AirAsia's entry into India's domestic market is aimed at insulating itself from any downturn in its business from international routes in the country. It is the 12th largest foreign airline in India with a weekly capacity of 18,720 seats to and from the country.

Its domestic and international routes will now complement each other Globally, the revenues and profits are higher in international aviation. Aviation experts say foreign airlines are unlikely to sit idle while international players

such as Etihad Airways and AirAsia sew up partnerships in the country. They might find it easier to enter the country by picking up a stake in existing airlines

such as SpiceJet, or even Kingfisher, instead of floating a new airline. "We had estimated that the FDI policy reform would lead to equity deals in two or

three existing airlines and one or two fresh startups," says KPMG's Dubey.

Future of Aviation Industry due to the deals

Confidence returning to Indian aviation: Minister Ajit Singh

The increasing interest of international airlines like Etihad, AirAsia and Singapore Airlines into the Indian passenger carriers signals renewed confidence in the sector, says Civil Aviation Minister Ajit Singh.

"All airlines-Etihad, AirAsia, Singapore Airlines-are the biggest and most professional companies in the aviation business. If they are interested in India, this shows a renewed confidence in the sector," Singh told IANS in an interview.

"In the long run, there is tremendous potential in the sector to grow."

“The cabinet approval for the Jet-Etihad deal was a positive move, which will help the industry, bogged down by heavy fuel and interest costs.”

"The alliance between Jet-Etihad is positive for the industry. It will ultimately benefit the passengers and boost the sector further."

"This will open possibilities of India becoming a hub for international travel. With projections showing a very rapid growth in passenger numbers and favourable geographic location, India requires more alliances for servicing passengers needs."

"We are looking into the matter as fuel constitutes nearly 50 percent of (airline) cost. We have also asked the states to cut the taxes on jet fuel."

Fuel prices comprise about 50 percent of the operating costs of airlines in India and have dented the sector as most airlines bleed under the high state sales tax regime.

The high state taxes are a legacy of a long-standing perception that jet fuel, which is a super-refined form of kerosene, should not be subsidised for air travel.

However, the Indian government continues to subsidise sensitive products like diesel, LPG (liquefied petroleum gas) cylinders and kerosene.

Currently, jet fuel sold in the country is nearly 50-60 percent costlier than in overseas markets like Bangkok, Singapore and Dubai, as an additional 4-34 percent state sales tax hikes its price.

Thank You

• WTO• GATT

WTO• The World Trade Organization (WTO) is the only global international

organization dealing with the rules of trade between nations. • At its heart are the WTO agreements, negotiated and signed by the

bulk of the world’s trading nations and ratified in their parliaments. • The goal is to help producers of goods and services, exporters, and

importers conduct their business.• Its main function is to ensure that trade flows as smoothly,

predictably and freely as possible.• By lowering trade barriers, the WTO’s system also breaks down

other barriers between peoples and nations.• The goal is to improve the welfare of the peoples of the member

countries

Air transport services• Air transport services are governed by a specific annex of the General Agreement on Trade

in Services (GATS). • The annex excludes from the agreement the largest part of air transport services: traffic

rights and services directly related to traffic. • These services are nevertheless subject to a regular review by the Council of Trade in

Services, with a view to considering the possible further application of the GATS to the sector.

• A first review took place in 2000-2003. • The second review is on-going. In preparation for the second review, the WTO Secretariat

developed the Quantitative Air Services Agreements Review (QUASAR) database and methodology to assess, on a universal scale, the degree of liberalization achieved by the air transport sector.

• The Secretariat also produced the Air Service Agreements Projector (ASAP), an analytical tool that allows for the visualisation of elements of the QUASAR database, notably information on an economy's network of bilateral Air Services Agreements and correlated traffic flows.

• On 16 January 2013, the Secretariat released an update to its ASAP tool, based on 2011 regulatory and traffic data.

Plurilateral agreement on trade in civil aircraft

• This agreement entered into force on 1 January 1980. It now has 31 signatories. Most WTO agreements are multilateral since they are signed by all WTO members. The agreement on trade in civil aircraft is one of two plurilateral agreements (with the agreement on government procurement) signed by a smaller number of WTO members. It eliminates import duties on all aircraft, other than military aircraft, as well as on all other products covered by the agreement — civil aircraft engines and their parts and components, all components and sub-assemblies of civil aircraft, and flight simulators and their parts and components.

General Agreement on Tariffs and Trade

• The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. According to its preamble, its purpose was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis." It was negotiated during the United Nations Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed in 1947 and lasted until 1994, when it was replaced by the World Trade Organization in 1995.